In a measure of the underlying growth of Cayman's financial services industry, a new report in the US has found that total hedge fund assets enjoyed double-digit growth in the first quarter of 2007.
Researchers at HFN (HedgeFund.net) estimated total assets to have increased by 11.5% to reach some US$2.4 trillion, compared to the previous quarter.
The substantial rise in total assets was the largest quarterly increase on record.
New assets flowing into the industry were estimated at US$168.6 billion and fund performance increased total assets an additional US$78.9 billion.
Total fund of fund assets increased 6% to an estimated US$1.1 trillion, including US$26.2 billion in new assets. Fund of funds now account for 48% of the assets in single manager funds compared to 50% in the fourth quarter of 2006, which HFN said indicated that large institutional investors were becoming more comfortable allocating directly to hedge funds.
Funds that invest assets globally were the fastest growing of any broad regional classification, which HFN said was likely the result of large institutional allocations requiring global diversification.
Total assets in funds with a global investment focus increased an estimated 13.3% in the first quarter to US$1.2 trillion. Latin America was the fastest growing specialty investment region.
The report also said that total assets in long/short equity strategies showed no signs of slowing down. Long/short equity assets rose an estimated 8.5% to US$712.1 billion in the first quarter, including US$30.9 billion in new assets. In the past year, total long/short equity assets rose S$189.1 billion.
HFN said distressed funds had returned an average of 13.5% in the 12 months ending in March, with one of the lowest correlations to broad equity markets. As a result, the strategy attracted over US$22.8 billion in new assets in the first quarter, bringing total assets in the strategy to an estimated US$173 billion, an increase of 23.5% from the previous quarter.
Emerging market fund assets continued to increase at a double digit rate, the report said. Total assets in such funds increased an estimated 15.3% to US$244.6 billion, including US$17.4 billion in new assets.
Convertible arbitrage funds began to attract asset in earnest again in the first quarter, said HFN. Total assets in convert funds increased an estimated 18.6% to US$64 billion including US$7.6 billion in new assets, the largest inflow for three years. Returns accounted for a quarter of the total asset increase and new allocations had been positive for four consecutive quarters.
Event-driven fund assets continued to draw assets, the report said, as levels increased an estimated 13.8% to US$270 billion including $18.8 billion in new assets.
HFN said that event-driven and special-situation funds had likely been cannibalising assets from merger arbitrage strategies, which saw an outflow of over US$6 billion in the first quarter, reducing the strategy's assets to US$27.2 billion, a drop of 14.8%.